Manipulation

Ever so often I receive e-mails questioning my views on manipulation. The
basic question is whether or not I believe in market manipulation. The basic
answer is, yes. I believe in what I can see and prove. Inflating the money
supply, lowering interest rates, raising interest rates, doctoring up unemployment
data as well as inflation data by excluding key items are all obvious forms
of manipulation.

Others talk about the Plunge Protection Team (PPT), which allegedly comes
into the market and buys futures to "control" the market. This is something
that I can't prove or disprove. Therefore, to form an opinion about any manipulative
efforts of this degree would not be based on fact. Without a basis of fact,
I see this no differently than guessing about UFO's or any other urban legend.
It is for that reason that I have to shy away from notions of manipulative
efforts of that degree. Hey, this is not to say that it does or doesn't happen.
This is only to say I can't prove it either way. Furthermore, I will argue
that if it does exist, it will not matter in the long run as all manipulative
efforts ultimately do fail.

Now, let's deal with what we do know. One thing that I do know is what the
internal strength data is telling me and it does support the liquidity infusion
that has obviously been underway. Over the last couple of weeks I have shown
you various measures of the internals. The bottom line is that when we look
at these internals in relation to the individual intermediate term advances
that have made up this entire Secondary Reaction that began at the 2002 Phase
I low, we find that each intermediate term advance has been on weaker and weaker
internals.

What we also know is that when we look at the internals in this light, we
find that they topped in June 2003. We find that the February 2004 intermediate
term advance topped with a divergent high on this Advance/Decline line. We
also know that in the past, when this happened the market was either at or
typically no more than one additional intermediate term cycle away from the
4-year cycle top. But, in this case the market has continued to hold and since
January has actually pushed higher with still increasingly weaker internals.
The point here is that this has been made possible on the back of the monumental
infusion of liquidity, also known as manipulation. It is also this same liquidity
infusion that has broken the historical norms on gold and fueled it up in an
ongoing unprecedented 6 th intermediate-term cycle up within the current 9-year
cycle. So, yes I do believe in manipulation at this level and both the gold
and the Advance/Decline data clearly show it.

PPT? We'll see about that when the show down between liquidity and the natural
forces of the bear market reappear later this year. Regardless of the degree
of manipulation, I believe that the natural forces of the market will ultimately
win out. I do not believe that any such efforts can make up for solid buying
and that it will ultimately only make matters worse once gravity takes over.

The following text on Manipulation was taken from Robert Rhea's book, The
Dow Theory.

"Manipulation is possible in the day to day movement of the averages, and
secondary reactions are subject to such an influence to a more limited degree,
but, the primary trend can never be manipulated.

Hamilton frequently discussed the subject of stock market manipulation.
There are many who will disagree with his belief that manipulation is a negligible
factor in primary movements, but it should always be remembered that he had,
as a background for his opinions, a most intimate acquaintance with the veterans
of Wall Street, and the advantage of having spent his life in accumulating
facts pertaining to financial matters.

The following comment, taken at random from his many editorials, affords
convincing proof that his views on the subject of manipulation did not vary:

'A limited number of stocks may be manipulated at one time, and may give
an entirely false view of the situation. It is impossible, however, to manipulate
the whole list so that the average price of 20 active stocks will show changes
sufficiently important to draw market deductions from them.' (Nov. 29, 1908)

'Anybody will admit that while manipulation is possible in the day-to-day
market movement, and the short swing is subject to such an influence in a
more limited degree, the great market movement must be beyond the manipulation
of the combined financial interests of the world.' (Feb.26, 1909)

'...the market itself is bigger than all the 'pools' and 'insiders' put
together.' (May 8, 1922)

'One of the greatest of misconceptions, that which has militated most against
the usefulness of the stock market barometer, is the belief that manipulation
can falsify stock market movements otherwise authoritative and instructive.
The writer claims no more authority than may come from twenty-two years of
stark intimacy with Wall Street, preceded by practical acquaintance with
the London Stock Exchange, the Paris Bourse and even that wildly speculative
market in gold shares, 'Between the Chains,' in Johannesburg in 1895. But
in all that experience, for what it may be worth, it is impossible to recall
a single instance of a major market movement which depended for its impetus,
or even for its genesis, upon manipulation. These discussions have been made
in vain if they have failed to show that all the primary bull markets and
every primary bear market have been vindicated, in the course of their development
and before their close, by the facts of general business, however much over-speculations
or over-liquidation may have tended to excess, as they always do, in the
last stage of the primary swing.' (The Stock Market Barometer) '...no power,
not the U. S. Treasury and the Federal Reserve System combined, could usefully
manipulate forty active stocks or deflect their record to any but a negligible
extent.' (April 27, 1923)

'The average amateur trader believes the stock market is guided in its
trends by a certain mysterious 'power,' this belief being the one factor,
next to impatience, most responsible for his losses. He reads tipster sheets
avidly; he scans the newspapers industriously for news likely, in his opinion,
to change the trend of the market. He does not seem to realize that by the
time the news of real importance is printed, its effect, so far as the basic
trend of the market is concerned, has long ago been discounted.'

'It is true that a flurry in the price of wheat or cotton may influence
the day to day movement of stock prices. Moreover, sometimes newspaper headlines
contain news which is construed as bullish or bearish by market dabblers,
who collectively rush in to buy or sell, thus influencing or 'manipulating'
the market for a short period. The professional speculator is always ready
to help the movement along by 'placing his line' while the little fellow
timidly 'lays out' a few shares; then, when the little fellow decides to
increase his commitments, the professional begins to unload and the reaction
ends, and the primary movement is again resumed. It is doubtful if many of
these reactions would ever be caused by newspaper headlines alone unless
the market was either overbought or oversold at the time---the 'technical
situation' so dear to the hearts of financial news reporters.'

'Those who believe the primary trend can be manipulated could, no doubt,
study the subject for a few days and be convinced that such a thing is impossible.
For instance, on September 1, 1929, the total market value of all stocks
listed on the New York Stock Exchange was reported to have amounted to more
than $89,000,000,000. Imagine the money which would have been involved in
depressing such a mass of values even 10 per cent!'

Yes, it is true that this is not the early 1900's. We also know that today
the Fed has more tools available to influence the market as well. But, at the
same time the markets are much, much larger than they were in the early 1900's.
So, even though the Fed has more tools available, is this fact over ridden
by the fact that the market is now many, many times larger than it was then?
Personally, I would say yes. Can the Fed actually hold the market up forever
and ever and create a period of endless prosperity without the market ever
experiencing Phase II or Phase III of the bear market? I guess this remains
to be seen, but my view is NO. At some point the poor breadth will override
the liquidity factor and the Phase II decline will begin. Once this occurs,
the test will then be how successful the damage control efforts of the move
into the Phase II low will be. If minimal damage is done, then yes, the manipulative
efforts will have been successful and we will all want to be long on the advance
that follows. But, if that decline is not contained, then the natural forces
will have won out. For now, the Secondary Trend remains positive.

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